In our last lesson we looked at specific strategies for trading the Head and Shoulders Pattern and the Reverse Head and Shoulders Pattern, two patterns which we view as reversal patterns when they show up in the stock, futures, or forex markets. In this lesson we are going to look at a pattern called the wedge pattern, which is unique in the sense that it can be viewed as either a reversal pattern or a continuation pattern, depending on the shape of the pattern and whether it is located in an uptrend or a downtrend.

The Falling Wedge Pattern:

The falling wedge pattern is characterized by a pattern which forms when the market makes lower lows and lower highs with a contracting range. When you find this pattern in a downtrend it is considered a reversal pattern as the contraction of the range indicates the downtrend is loosing steam.

When you find this pattern in an uptend it is considered a bullish pattern as the market range becomes narrower into the correction indicating that it is running out of steam and the resumption of the uptrend is in the making.

The Rising Wedge:

The rising wedge pattern is characterized by a pattern which forms when the market makes higher highs and higher lows with a contracting range. When you find this pattern in an uptrend it is considered a reversal pattern as the contraction of the range indicates that the uptrend is loosing steam. When you find this pattern in a downtrend it is considered a bullish pattern as the market range becomes narrower into the correction indicating that it is running out of steam and the resumption of the downtrend is in the making.

That's our lesson for today. You should now have a good understanding of the falling and rising wedge pattern and situations where they are considered a reversal pattern and situations where they are considered a continuation pattern. In our next lesson we are going to go over a strategy for trading rising and falling wedge patterns complete with entry and exit points and how to determine each.

As always if you have any questions please feel free to leave them in the comments section below, and have a great day!